OnLive has only 2 potential customers: Microsoft and Sony

The analysis and commentary on the OnLive service announced at GDC last month is all missing the point. OnLive isn’t aimed at consumers. It’s aimed at the only two potential customers in the world: Microsoft and Sony.

The big news at GDC last month was OnLive, a streaming video game service that claims to offer top quality games with outstanding graphics instantly through a broadband connection.

While the company made a huge impact at the show, the service has met with a great deal of scepticism. Eurogamer ran a two page detailed analysis of the service, concluding that OnLive can’t possibly work. Many industry commentators argue that the cost of the server farms required to deliver these games will be impossibly huge and broadband speeds are not high enough to deliver this service.

Where’s the compelling content?

Whether or not the technology works (and I’m inclined to think that it works at some level), there is a broader question that has not been addressed: the source of compelling content.

OnLive boasts that it has the backing of publishers including EA, Ubisoft, Take2, Eidos, Atari, Codemasters and THQ. This seems perfectly likely, since the publishers are trying to investigate a range of digital download options like Steam and Metaboli. Why not also add OnLive to the mix? If the service doesn’t take off, no skin off their noses. It’s not like they have given an exclusive or anything.

And that’s the crux of the matter. OnLive has no exclusive content. An OnLive customer can get his games from OnLive. Or he can get them on the PC. Or the Xbox 360. Or the PlayStation 3.

To which OnLive would respond “But why would he, when he get them all, blisteringly fast, from us?”

And to which I would answer “Because he already does”.

OnLive is trying to push through a major change in gamer behaviour. Gone is the model of buying a console and then buying games for it when you have the money or the inclination. In comes a monthly subscription analogous to subscribing to cable TV.

OnLive wants us to throw out oour cash investment in an expensive console or premium gaming PC. To throw out our libraries of games and start over.

And the problem is not that it won’t make sense for some people. It surely will. The problem is whether it will make sense for enough people to cover the insane capital expenditure to build the network.

But surely that was the problem with satellite TV?

The analogy with pay-TV is a strong one. The capital intensity of paying for or licensing a transponder on a satellite in orbit or building out a cable network makes it a very risky investment. Until the service reaches critical mass, the service haemorrhages cash. This is exactly the problem that Rupert Murdoch had with his Sky satellite service.

Until he secured exclusive rights to the Premiership Football League.

Suddenly, 40% of the British population found that the only way they could watch key football matches on a Saturday afternoon was to subscribe to Sky. Sky never looked back and currently has over 9 million subscribers in the UK and Ireland.

So all OnLive needs to do is to secure some must-have content that is so compelling that millions of people will have to subscribe to its service, rather than getting their games the old-fashioned way on consoles or via download services like Steam, Metaboli and AWOMO.

The problem is, I struggle to think of any gaming content that is anywhere close to the value of Premiership football.

The nearest I can think is World of Warcraft. If OnLive could persuade Activision to make WoW an OnLive exclusive, that’s up to 11 million players who might be forced to convert. (Of course, many of these players are in China or other territories where they are unlikely to pay for an OnLive subscription). Warcraft generates over $1.1 billion in revenue every year. The mind boggles at the amount that OnLive would have to pay to secure a multi-year exclusivity deal. It would certainly be multiples of the costs of the server farms and infrastructure that so many analysts seem worried about.

So even assuming that the technology works, acquiring the compelling content to make the service attractive to consumers may be prohibitive.

Is OnLive just a mad idea?

So what is Steve Perlman up to? The CEO of OnLive is no stranger to grandiose technologies. In 1995, Perlman founded WebTV, a pioneering combination of a cheap set-top box and a subscription service that streamed Internet access to the television. Two years later, Perlman sold the service to Microsoft for $425 million as part of Microsoft’s “long-term effort to combine the best of the Internet and the best of digital television technology.” The service had approximately 50,000 subscribers, valuing each subscriber at over $8,000.

In essence, Perlman persuaded Microsoft that it need the WebTV technology to be at the forefront of digital technology, especially as that technology moved to the living room and threatened Microsoft’s dominance of the PC market.

Sound familiar?

It’s all about the exit

I don’t believe that OnLive is really a consumer proposition. Oh, it will launch, and it will get a few tens of thousands of subscribers. But that is not its purpose.

Both Sony and Microsoft (and to a lesser extent, Nintendo) know that the future of gaming is online. Retail boxes will disappear and the vast majority of gaming content will be streamed or downloaded over the Web.

Now just imagine if the OnLive technology lived up to its promises; if games could be downloaded and played instantly on a console; and if the breakthroughs are protected by patents.

And then ask yourself: which next console would you buy? The one that offered instantly-available high-quality content delivered to an inexpensive set-top box for one low monthly subscription. Or the expensive one that didn’t.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: thecurveonline.com

“But to challenge your point, at the start of the lifecycle, we don’t pay Sony or Microsoft for the hardware: they pay us, because they make a loss on each console until economies of scale and new techniques bring costs of production down. They make their money from the royalties they charge publishers to put games out on their platform.”

The key here is “at the start of the lifecycle.” This argument was stronger when consoles were ALWAYS a loss leader. These days they make their money back plus on any console that survives its first year or so of life.

And remember that this is a conscious marketing choice on their part. They don’t *have* to offer that loss leader– Nintendo never has.

But to challenge your point, at the start of the lifecycle, we don’t pay Sony or Microsoft for the hardware: they pay us, because they make a loss on each console until economies of scale and new techniques bring costs of production down. They make their money from the royalties they charge publishers to put games out on their platform.

If instead we subscribed at, say $20 a month (like cable or satellite) using OnLive, over 5 years, that could be very interesting for MS/Sony.

But I buy your point that cable companies are also logical buyers.

Cyberqat

(The above typo should have read “IF onlive….” )

Cyberqat

Sony or Microsoft are going to ditch the hardware that they make and you pay for and replace it with a service that uses incredible amounts of things they have to pay for? (Bandwidth and servers.)

Not in this lifetime.

IF online can be made to work reliably and cost effectively over the real internet (A big if). The only possible buyers are bandwidth providers as a way to push more sales of *their* product.

So if your looking for a but out strategy I think Comcast or Verizon are your only hope.

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Gamesbrief is a blog about the business of games. We look behind the headlines to tell you not just what is happening to games, but why it matters to your business. From Activision to Zynga, we analyse the companies who are making waves in the games industry and the new platforms, like Facebook, iPhone and Unity, that are changing the market.